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Polishing the Crystal Ball

Utilizing a Cashflow Chart

No matter what part your business plays in the pool industry, you have undoubtedly had occasion where you have identified a trend within your business that began several months or even years ago. In identifying the trend, positive or negative, you are aware today of how you could have taken advantage of the situation if you had known the trend was developing.

A dealer may have wished that he had been able to see a trend occurring in repeated repair bills for a piece of equipment that is used so that he could have replaced the equipment. A dealer may have not seen a trend in sales of a particular size or type of accessory, and sales are missed because of lack of inventory. Each of these scenarios, as a stand alone event, are probably not fatal to the business.

Every month, businesses in the pool industry are unfortunately failing to look for trends that do have the potential to be fatal. Many businesses have developed the habit of gathering various financial data each month, passing the information to an accountant or data processing firm, and then waiting for financial reports to be delivered.

Often this report is received more than 30 days after the end of the month. In cases where the data is incorrectly recorded, the financial reports are wrong. The following month, corrections are made. But in looking at either of these reports a year later, there will be tremendous discrepancies.

To make matters worse, when the report is received, our example business owner will examine the gross revenue, net profit, gross margin and maybe one or two expense lines that have been reason for previous concern. The financial reports, usually a balance sheet and a profit and loss statement, are then filed away.

If ever a business was looking for a crystal ball that would assist in forecasting the financial future of a business, these two financial reports are the first two essential components. It is these two reports that are filled with information that can assist you in taking advantage of situations that can increase sales, decrease expenses, and more importantly predict the ebb and flow of cash.

The third part of the crystal ball is the cash flow chart, which is created by taking key bits of information from those financial sheets. Each bit of information which can, in any manner, affect the balance in the checking account, is placed in the cash flow chart; the bottom line of the chart being the amount of cash on hand at the end of the month.

And with the completion of each month, the chart is again updated. This effort brings the future of the business, into clearer focus. With a cash flow chart, just like your profit and loss statement, you can choose to utilize a cash basis or an accrual basis. With cash basis accounting, the simpler of the two methods, entries appear on the forms as they actually occur. With accrual accounting, certain large payments and receipts are posted to the financial sheets in increments.

This is designed to create a more stable set of financial statements. For example, using the accrual basis, a business with gross revenue of less than one million dollars would probably accrue an income or expense greater than one thousand dollars. This could include annual payment of property taxes, rent overages, and could also be used for bi-weekly pay periods as there would be two months with three pay periods.

A cash flow chart, whether created on a ledger pad or utilizing a computer spread sheet program, begins with the cash in the account on the first day of the month. Add to that all of the actual receipts of money for the month. Subtracted from that subtotal would be all of the dollars spent for inventory purchases and the total of all expenses, leaving a figure which will represent the cash on hand at the end of the month.

Using a program such as Microsoft Excel, the business owner can develop an elaborate cash flow chart. He can input the previous twelve months of financial sheets and begin to make forecasts for the next 12 months. By changing from the historical figures of sales, margin, and inventory levels, to projected figures, the business owner can anticipate the necessary cash flow. As updated figures are entered each month, the near future becomes easier to predict and additional months can be added to the spread sheet so that there is a constant 12 month forecast.

Businesses that are using an accrual basis for accounting can further use a cash flow chart to calculate their purchases of inventory, equipment, and other expenditures which will be paid for in the following two to twelve months. Too often a business, riding the crest of increased sales, over extends itself in purchasing inventory or making improvements to the facilities. A cash flow chart would quickly show a business that the appearance of excessive cash today is actually the dollars necessary for the next few months.

It is important in using a cash flow chart that it be kept up to date. One dealer reported he had spent a sizeable amount of money having an accountant create a cash flow chart. During the first three months of the year, he was awarded several service contracts, causing him to underestimate sales by some 50 percent. His comment was that the cash flow chart did not work for him. The actual problem was the accountant failed to explain the cash flow chart was information that needed to be updated monthly.

While this problem may appear to be one that many businesses would like to have, it could be a leading cause of business failure if the collections, purchases of equipment, and salaries are not supported by a substantial cash reserve or a line of credit.

While the situation of the above dealer does not occur frequently, for many dealers there will undoubtedly be months where there will be cash flow excesses and shortages, as few businesses have the same level of revenue each month of the year.

The idea of a business creating a cash flow chart is not to replace the accountant being utilized. If the dealer in the previous example were in need of a line of credit, the services of an accountant would be crucial in creating the proper documentation for a bank.

Unfortunately, many accountants are looking at a business from a historical perspective as compared to the position of a visionary. Both positions are necessary, but the business owner and the accountant can not both look at the situation from the same perspective all the time.

Another factor to be concerned with is the timeliness in which the cash flow chart is created each month. Simply stated, if you want to be able to affect business in August, you need to complete your July cash flow chart within the first week of August. How important is it to be able to make these quick changes?

Consider that for every $750,000 in gross revenue, and a 3 percent net income, a savings in expenses of a mere $100 per month produces the same result as if a business had increased sales by $40,000 for the year.

This sample of information is an example of utilizing a cash flow chart to assist in creating "what if" scenarios. In addition to this example, a cash flow chart can anticipate the effect of a sales increase, a change in gross margin, or extended dating on the net income and cash position.

You may have thought the crystal ball only appeared in fantasy movies. But, the cash flow chart is a far superior way to see the future of your business.

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This article is copyrighted by Tom Shay and Profits Plus Solutions, who can be reached at: PO Box 1577, St. Petersburg, Fl. 33731. Phone 727-464-2182. It may be printed for an individual to read, but not duplicated or distributed without expressed written consent of the copyright owner.

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Profits Plus Solutions, Inc.
PO Box 1577
St. Petersburg, Fl 33731
(727) 464-2182
Fax: (727) 898-3179